The Fed has trapped itself. If Kevin Warsh hadn’t sounded like a “hawk” at Jackson Hole, the modest 0.3% monthly rise in core inflation would hardly have provided grounds for the US dollar to strengthen. However, the Fed Chair’s statement that he was not misled by June and July’s consumer price slowdown figures prompted the futures market to raise the probability of monetary policy tightening in September from 70% to 86%. At one point, it exceeded 90%. This became a death sentence for EURUSD.
Kevin Warsh finds himself in zugzwang. Any move he makes will worsen his position. Raising rates just seven weeks before the midterm elections will provoke fierce discontent from Donald Trump. Keeping them unchanged, however, would deal a blow to confidence in the Fed. It’s unlikely the new central bank chief wants to go down in history as someone who succumbed to pressure from the US President. Even if he wanted to please the White House occupant, it’s unlikely to work out.
The thing is, the only way to temper futures market expectations for a continuation of the monetary tightening cycle after its September start is through direct guidance. Yet Kevin Warsh has made it abundantly clear that he has no intention of giving the market any signals. Otherwise, one could argue that the current monetary policy tightening is nothing more than a reversal of previous stimulus measures. Recall that rate cuts took place at the end of 2025. Under such a scenario, investors would have limited their forecasts to 2-3 steps along the path of monetary restriction, and the US dollar would hardly have strengthened significantly.
Currently, the futures market is reacting to the upcoming FOMC meeting in a “the Fed said A, so it must say B” mode. In other words, a federal funds rate hike looks like a done deal, but it’s unlikely that Committee members believe inflation can be cooled with a single act of monetary tightening. There will need to be several. As for exactly how many, Kevin Warsh is unlikely to answer that question at the press conference, especially under serious political pressure.
The clue should be sought in the updated FOMC projections. Given the surge in oil prices due to the escalation of the Middle East conflict, it makes sense to expect “hawkish” signals from the Federal Open Market Committee. This circumstance allows the US dollar to strengthen ahead of the Fed meeting. The greenback is being bought on rumors.
